Elliott Wave may find answers this week

AviGilburt

Avi Gilburt is author of
ElliottWaveTrader.net, a live trading room and member forum focusing on
Elliott Wave market analysis. Avi emphasizes a comprehensive reading of charts
and wave counts that is free of personal bias or predisposition. A lawyer and
accountant by training, he is also managing member of Gilburt Financial
Services, LLC, which provides financial markets analysis and consulting. His
Elliott Wave analysis appears frequently on sites such as SeekingAlpha, where he
is a certified contributor, and
TheTechTrader.com with Harry Boxer.

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While we had some nice movement to the upside this week, I still cannot wholeheartedly advise everyone to "buy, buy, buy" at this point in time. However, I do feel that the upcoming week will provide us with some very important answers in multiple markets.

The main issue, as I see it, is whether the market has completed a 4th wave consolidation and is now in wave 5 up, or are we only in a larger b-wave rise within a larger a-b-c 4th wave consolidation, which is setting up a c-wave down. Unfortunately, I see solid arguments for both sides of this trade, which means we need more data to be able to trade the next market move appropriately.

Bullish Arguments - Wave (5) Has Begun

First, from a bullish standpoint, I want to point to a fractal from 2010 that suggests that the market is about to embark upon a strong rally to the upside. If you look at the weekly S&P 500 chart, I have highlighted a correction in 2010 which is a fractal that would suggest the market will be heading higher quite immediately.

At the end of 2010, the market backed away from a resistance level in an almost exact pattern in which we have recently backed away from our current resistance region overhead. Based upon this fractal, we should be within a week or two from breaking over the prior resistance region of the 1420-1430 region.

If we follow through on this fractal, the market will be extending to higher than the 1530 region, and can potentially even extend up to the A=C target region in the 1570 region in the S&P 500 before a massive correction is seen.

Second, bearish sentiment, as of April 25, 2012, has risen to 37.4% according to the AAII, compared to the long-term average for bearishness at 30%. Bullish sentiment has dropped to 27.6%, whereas the long-term average is 39%. This does leave a lot of room for the markets to rally just to get to the average sentiment readings.

Third, whereas, as noted on Thursday night, the market had an Elliott Wave set up for a potentially larger decline on Friday, it did not follow through, even in light of the disappointing GDP news and the degraded Spanish Bond ratings.

Furthermore, when we consider that the U.S national debt has now grown larger than the U.S. GDP, and this was completely ignored by the market, it could very well mean that the sentiment is not yet ripe for a sizeable decline.

Fourth, since our overall perspective remains that the precious metals market is about to enter into a strong rally, while it is not conclusive evidence that the equity markets will run strongly with the metals, it is reasonable to assume that they could rally in unison, leading to all risk-assets topping together (and, yes, I view the metals as risk assets).

Bearish Arguments - B-wave in Wave (4)

First, although the USD has been heading to the downside this past week, the slow stochastics are in an oversold level. However, we are seeing negative divergences in the MACD when the price has not made a relative new low, which would indicate that the DXY has further to fall. Yet, we are also seeing positive divergences in the MACD on the 144-minute chart.

Additionally, the MACD on the daily chart is approaching a longer-term support line, which could provide the support needed for a push up in the DXY. So, although there are some bullish indications that the dollar can rise right around the corner, which would often, but not always, have a negative connotation for the equity markets, the situation is a bit mixed at this time.

However, I would also remind you that the positive divergences in the MACD that we have seen on our 144-minute chart in the past have been rather accurate in warning of a strong positive move for the dollar. But, ultimately, the overall pattern does suggest that the DXY will be heading lower this year, and the real question we are left with is if we have hit the intermediate-term high already, or is there one more push up in the DXY before it falls hard.

Second, the McClellan Oscillator has now moved into the topping zone, as it moved up to the 134 level on Friday. Although this does not necessarily mean that a decline is imminent, it does tell us that the market is a bit extended and may not be on the cusp of a massive move to the upside, whereas a decline of some significance from this region is possible, as we mentioned last week.

Third, the Barclays Bank PLC iPath S&P 500 VIX Short-Term Futures ETN
VXX, +2.68%
has provided us with a pattern that can be easily interpreted as an a=c corrective b-wave, which has held the 16.00 support level even though the market was moving up. From this level, we have Fibonacci extensions that take us right to the targets we have had for a larger 4th wave for the VXX for several weeks now. In fact, the larger yellow A=C extension takes us right to the 21 region, whereas the 1.382 extension takes us to the 23 region.

Furthermore, the daily RSI has been exhibiting a positive divergence at today's lows for the VXX as compared to the prior lows in this region for the VXX. Additionally, the 144-minute chart RSI is also providing positive divergences, and the five-minute-chart MACD is also providing strong positive divergences.

Fourth, the volume for this rise has been lackluster, to say the least, and even declining the higher we moved up, and the last several days have caused negative divergence in the MACD in our 60-minute E-Mini S&P 500
ESM2
chart.

I think it would also be apropos to remind everyone of Frost & Prechter's description of B-waves at this juncture:

B waves are phonies. They are sucker plays ... they are often involve a focus of a narrow list of stocks, are often "unconfirmed" by other averages, are rarely technically strong, and are virtually always doomed to complete retracement by a Wave C. If the analyst can easily say to himself, "There is something wrong with this market," chances are it's a B wave.

Conclusion

While there are clear indications that something just does not seem right about the recent rise, if the USD and the VXX were to take our their recent support levels, I would be much more comfortable in siding with the bullish argument and bullish fractal. But, as of Friday, there is still a possibility of a reversal in the VXX and USD, so we must be considering the possibility of the bearish scenario for the upcoming week until those indications are invalidated.

If the bearish scenario were to take hold this coming week, then the market will probably not exceed the 1404ES level, which is the .764 retracement of the prior market decline from the market highs reached at the end of March. The ideal target region for the c-wave of a larger wave (4) would be the mid 1330 region, which is where the a-wave would be equal to the c-wave.

Furthermore, since 4th waves tend to find support at the level of a 4th wave of a lesser degree, the low of the 4th wave of the 3rd wave is located at the 1333ES level, which provides very nice confluence for a target. For this scenario, we will need to see an appropriate impulsive set up to the downside early next week to set up a short trade which would target 1333ES.

But with the bearishness at higher-than-average readings, we do have to give the bulls the benefit of the doubt. Therefore, any 3-wave corrective decline that we see this upcoming week will have to be a buying opportunity for higher levels to be seen based upon the 2010 fractal. Furthermore, a breakdown in the VXX below the 16.00 level is also to be seen as an indication that the market is heading appreciably higher.

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